Maximize Revenue 101: Should You Lower or Increase the Product Price to Increase Revenue?

If you sell products from your website then you probably ask yourself this question a lot. Few of my users have asked the following question in slightly different shape or form many times, so I decided to share some of my own experiences and results from my own tests which might help some of you:

I want to increase my revenue and obviously getting more traffic to the site would help but I have been wondering if I can tweak my product prices to help with this in the short term?

There is no way to know for sure unless you perform some testing yourself because your situation is most likely a lot different than mine. In this article I will share some test methods, basic theories, my test results and things to keep in mind to help you find the answer to your question.

1. Basic Theory

We can express the total revenue using the following simple formula:
Revenue = Conversion * Price

Simple Example: If your product is priced at $47 and if you have 10 sales everyday then your revenue per day would be $470. So every month you would make about 14k.

Aim: your aim is to tweak the “PRICE” variable in the above equation so it yields more than $470 per day.

The above equation sounds simple enough but the KEY is actually to find out the relationship between the “price” and the “conversion” variables for the product in question. In other words, we need to find out how the conversion number changes as you change the price variable.

The relationship between the price and the conversion variables can be expressed with the following formula:
Conversion = K/Price

Basically, conversion number is inversely proportional to your price amount. K is the unknown constant that we need to find out via testing to solve this whole equation. Finally those math lessons are coming in handy :). Lets refer to K as the “conversion constant”.

According to the above formula, as your price amount increases your conversion number will drop and vice version (you probably didn’t need a formula to understand that but it helps when you are trying to prove something mathematically).

2. Test Method

You want to find out how your conversion constant changes as you change the price of the product. This will help you find that sweet spot where it yields the maximum positive result.

The best way to find out how your conversion constant reacts to the price change is to setup a split test (A/B Testing) with your sales page. So you are going to have two copies of your sales page with two different prices for the product (for example: sales page A will offer the product for $47 and sales page B will offer the product for $97). You then serve “sales page A” to 50% of your customers and serve “sales page B” to the other 50% of your customers (preferably randomly). Once you have enough data, you can then setup another split testing scenario with another two price points and gather more data.

This will help you measure the conversion constant for different price points. When you plug these numbers in the formula mentioned above it will help you find out the sweet spot.

3. My Test Results

Time for some live test data from the tests that I performed on one of my product selling sites (these numbers are not from Tips and Tricks HQ products)

Test Result 1:

When I halved the price of the product the conversion constant went up by 2.8 times.

So if I was selling the product at $50 and I sold 5 copies everyday, the number went up by 2.8 times to 14 copies per day when the price went down to $25.

Total revenue @$50 = $250 ($50*5) = About 7.5k per month

Total revenue @$25 = $350 ($25*14) = About 10.5k per month

Test Result 2:

When I lowered the price by 25% the conversion constant was still holding over 2 (2.2 to be exact).

So if I was selling the product at $50 and I sold 5 copies everyday, the number went up by 2.2 times to 11 copies per day when the price went down to $37.5.

Total revenue @$50 = $250 ($50*5) = About 7.5k per month

Total revenue @$37.5 = $412 ($37.5*11) = About 12.5k per month

Test Result 3:

When I increased the price to double; the conversion constant went down to .25

So when I bumped the price to $100 it was only selling about 1 copy per day:

Total revenue @$50 = $250 ($50*5) = About 7.5k per month

Total revenue @$100 = $100 ($100*1) = About 3k per month

You probably know by now which option I decided to go with 🙂

4. Things to keep in mind

Remember that you are not focusing on the “Number of sales”, you are more interested in the total revenue. So for example: lowering the prices will most likely increase your number of sales but the question to ask yourself is, “Does it actually result in a total revenue increase?”

Don’t come to a conclusion that lowering the product price will always yield more revenue. Do your own testing and you might find out that increasing the product price actually gives you more revenue given your situation.

Treat each product uniquely. Just because one method works for a particular product does not mean that the same will work on all of your products.

You can also use these numbers to figure out how much discount you want to offer when you run special deals for your products.

Reader Interactions

Comments (18 responses)

Very helpful article-thanks. I’d love to interview the writer for my upcoming event, 60 Days to Pricing success: how to set, say& get your right price. Please email me if you’re interested. So many people struggle with the difference between revenue & profit I did a podcast about it. Great tips & tools thanks!

adminsays:

January 22, 2012 at 10:26 am

I understand where you are coming from. You can always test with small changes. For example: if you do a split testing with $50 and $40 I don’t think your customers will be upset. I think people are used to the fact that not all shops will offer the exact same price for an item.

Leahsays:

January 22, 2012 at 2:41 am

I have reservations about doing this experiment in my small market. I see the value in it, however, so please do tell if you see an alternative or way to tweek this in order to get the same information.

My reservation stems from the time I was OUTRAGED when I paid $80 for a monthly membership to something and then found another mirror site with $40 for the same thing. I was livid – emailed everyone trying to expose the scam. Now I’m thinking they were simply testing the waters. As a customer, it threw me for a loop & left a bad taste in my mouth because I thought for sure I’d been had.

Nice looking plugin, which I’m going to play with with a view to switching from a well known competitor… 🙂

Your explanation of A/B testing is good too, but not necessarily that useful to those of us selling tangible product. Those products have a (more or less) fixed cost per unit, and increasing revenue is no good if you do it at the expense of profitability. I recently heard a story of someone marketing a product similar to mine; she let herself be talked down to selling at a wholesale price of £1 per unit, when her production cost was more like £1.10 per unit. The people she sold to are retailing that product at £2.25!

As we sometimes say “Revenue is vanity, profit is sanity”.

Your formula still works with a little tweaking though; we just need to look at gross margin rather than total revenue. Gross margin is what percentage of the selling price is profit. Thus if an item cost us $20, and we sell it for $30, our margin is $10. To calculate the optimum price for tangible goods, the formula we need is

Profit = Conversion * Margin

where

Conversion = K/Margin.

Cheers all 🙂

adminsays:

August 7, 2011 at 1:01 am

Thanks John 🙂

johnsays:

August 6, 2011 at 7:27 pm

Your welcome, I do that all the time myself. LOL.

Your message is relevant for everything that is sold.

Always be measuring and testing, thats the way to better profitabilty.

Your message about looking after your customers is so true. I recently had to renew my yearly driving insurance which I pay monthly. The company were offering the same type of insurance deal to new customers which worked out about $205 dollars cheaper than they were renewing my insurance for. I ask the company to lower my premiums and they said they could not as this deal was only for new customers.

I went and placed my business with another company and was given the deal I wanted.

Moral of the story is, don’t take your existing customers for granted or they will go elsewhere. A small increase may be acceptable, but not a giant increase to an existing customer while at the same time giving a new customer a giant saving.

Look after your customers, give them new quality products, and most of them will stay with you for life and buy most of your products over time.

I know you get that because I have followed the development of your site and products over a number of years and can see the great quality, support and communication that you provide to your customers, and prospective customers.

Keep up the good work.

Regards

John

adminsays:

August 6, 2011 at 12:47 pm

@john, thanks.. corrected the error.

johnsays:

August 6, 2011 at 6:56 am

Hi

Have you maybe made an error in your calculation? or am I reading it wrong.

$50 x 5 = $250 and not the $125 that you show in your calculations.

Helpful article by the way.

John

adminsays:

August 6, 2011 at 3:49 am

One common practice when selling services is to keep the prices for your existing customers the same. So only your new customers will pay the new price. Prices over time tend to go up, so as long as you explain to your customers nicely most of them will understand.

Robertsays:

August 6, 2011 at 3:42 am

I have often wondered if my service is priced too low. I know my service is premium but how should I go about raising the price without upsetting current clients?

adminsays:

August 6, 2011 at 3:30 am

There are a few split testing options out there. Google website optimizer is a really good one. You can even manually monitor the effect of price changes on a per month basis if you want to do some basic testing without getting too involved.

Petersays:

August 6, 2011 at 3:17 am

This theory is so much better than blindly changing prices every month and hoping for the best! Thank you for such a nicely explained article. I am off to setting up some testing of my own. What do you recommend for the split testing?